■ Bernard Arnault made it his business to own the most attractive
names across the spectrum of luxury goods, cosmetics, and beverages. As
chairman and CEO of Moét Hennessy Louis Vuitton (LVMH), he had an
intense drive and seemingly insatiable corporate appetite that earned him
a reputation as a financier interested only in profits. Yet those who
dismissed him as an angry caricature missed the point; his shrewd moves
proved that his expertise in brand management was unmatched by the
competition. In 2002 LVMH had $13 billion in sales, distributing luxury
products that included Dom Perignon and Moét & Chandon
champagnes; Hennessy and Hines cognacs; Louis Vuitton and Loewe luggage,
leather goods and accessories; Christian Dior and Givenchy perfumes and
cosmetics. LVMH also had interests in the DFS and Sephora retail groups.

LEARNING THE FAMILY BUSINESS

Arnault grew up in Roubaix, northern France. After graduating from the
École Polytechnique, France's esteemed engineering school,
Arnault worked as an engineer and ran his family's construction and
property business firm, Ferret-Savinel. Years ahead of the competition, he
spearheaded the

Bernard Arnault.

AP/Wide World Photos

.

company's move into the lucrative new niche of building time shares
on the Riviera. However, when the French Socialists rose to power in 1981,
Arnault immigrated to the United States with his wife and two young
children. He prospered, developing condominiums in Palm Beach, Florida,
but after three years turned to developing a U.S. branch of his
family's property business. His time in America left an indelible
impression. Before leaving, he sold his Mediterranean-style home in
suburban New York to a neighbor, the mogul John Kluge, who promptly had it
removed to improve his view. The unfortunate fate of his beautiful home
taught Arnault a useful lesson: "When something has to be done, do
it! In France we are
full of good ideas, but we rarely put them into practice" (
Forbes
, June 2, 1997).

ENTRÉE INTO THE LUXURY MARKET REQUIRES POWERFUL BACKING

The French Socialists switched to a more conservative economic course in
1983, prompting Arnault to return to his native France. His rise to
control of the world's largest luxury group began with an
opportunity created when a textile firm, Boussac, went bankrupt. The
French government was looking for someone to take over the textile empire,
which comprised several foundering businesses, including a disposable
diaper company and the once-prized couture house of Christian Dior.

Arnault soon gained a powerful friend in Antoine Bernheim, managing
partner of the investment firm of Lazard Fréres. Bernheim arranged
the financing for Arnault's acquisition of Boussac. The Arnault
family put up just $15 million of their own money, with Lazard supplying
the rest of the reported $80 million purchase price. The main reason
Arnault bought Boussac was to get Dior, which he viewed as the potential
cornerstone of a "luxury-goods supermarket," where a rising
global bourgeoisie would shop. Arnault quickly expanded Dior to include
new brands: the fashion house of Christian Lacroix and Celine, a
leather-goods house known for its loafers.

A BRUTAL RISE TO POWER

Next Arnault unloaded Boussac's disposable-diaper business and much
of its textiles operations, gaining a $400 million windfall in the
process. This sale enabled him to buy his way into LVMH in 1989,
purchasing $1.8 billion in LVMH shares and forging a deal that gave him
control of 24 percent of the group. A bitter power struggle ensued between
Arnault and Henry Racamier, the former chairman of LVMH's Louis
Vuitton subsidiary and a member by marriage of one of the firm's
founding families. After more than a year, Arnault won a series of court
battles, Racamier was ousted, and Arnault purged LVMH's top Vuitton
executives. His takeover of LVMH was one of the roughest in
France's business history and earned Arnault a reputation for
viciousness that was solidified by the numerous layoffs that followed his
rise to power. According to a former officer of Louis Vuitton who was
fired in the purge, "He's an asset shuffler, a raider, a
French Donald Trump" (
BusinessWeek
, July 30, 1990). But many people respected Arnault's business
strategy and penchant for risk taking. Among his admirers was Gilles
Cahen-Salvador, who at the time ran the financial firm LBO France.
"People like him are setting good examples for the French
economy," said Cahen-Salvador (
BusinessWeek
, July 30, 1990).

BALANCING COMMERCE AND ARTISTRY

With the LVMH victory Arnault began assembling the pieces of his
"luxury-goods supermarket," following a business model that
balanced sound practices and creativity. He believed that to raise
creative energy, a company must have managers with a certain love for and
understanding of artists. In an interview with Suzy Wetlaufer for
Harvard Business Review
(October 2001), Arnault said, "If you deeply appreciate and love
what creative people do and how they think, which is usually in
unpredictable and irrational ways, then you can start to understand them.
And finally, you can see inside their minds and DNA." Putting his
model into action, at Dior, Arnault hired John Galliano, an up-and-coming
designer with a flair for melodrama and unusual creations, including
dresses fashioned out of newspapers. The move represented a new direction
for the haute couture company. Said
Vogue
's editor-in-chief, Anna Wintour, "What I think is so
brilliant about Bernard is that he realized that to revitalize this
boring, dusty, fuddy-duddy old house, he had to go with the shock of the
new. Most businessmen wouldn't understand. They wouldn't
have that sensibility and that flair" (
Washington Post
, April 28, 2002). This aspect of Arnault's competitive edge came
partly from his background as an amateur artist. Although he concluded
early in life that he did not have the mettle for a career as a concert
pianist, Arnault was classically trained and made time to practice Chopin,
Liszt, and Schumann. Both his wife and mother were pianists as well.

Unique among the world's leading CEOs, Arnault had the ability to
relate to both the creative and financial aspects of running a business.
Although he did not believe in limiting his artists' innovation, he
insisted on financial discipline when producing, marketing, and selling
his company's products. He understood that, in a successful
corporate culture, the counterbalance to creativity must be commerce. He
never hesitated to reign in, or outright terminate, creative executives
who did not produce. In 1995 Arnault fired the heads of Dior perfumes and
a top manager at Givenchy, replacing them with executives from U.S.
consumer brands from outside the fashion industry. The new executives,
with Arnault's blessings, made unpopular but profitable changes,
including eliminating the cellophane inside the Givenchy perfume box,
arguing that the cost outweighed any added cachet. The results were some
"star brands" that were both modern and timeless.
"Our strategy is to have some stars—and there are not many
stars in the luxury business. What is a star? It's a name that is
the very best. It's a name that is very profitable. But the number
of true stars is less than I can count on both of my hands" (
New York Times
, March 25, 2001).

A BOURGEOISIE SHOPPING SPREE

Throughout the 1990s Arnault amassed an empire of indulgence, purchasing
dozens of luxury-goods makers;
strengthening his presence in Europe, North America, and Asia; and
expanding into South America and Australia. To his company's roster
he added wine and spirits as well as Louis Vuitton luggage and Givenchy
clothes and perfume. He bought up watches (TAG Heuer), a cosmetics line
(Sephora), and even a magazine (
Art and Auction
). Initially, many of his competitors told him his company was getting too
big, that he should focus on one brand. Soon, however, LVMH had its
imitators. In Italy, Gucci expressed a similar appetite for the
luxury-goods market, as did the owner of Cartier in Switzerland. Of his
competition, Arnault said in the
Washington Post
(April 28, 2002), "They saw it was working. And then they said,
'Okay, now we are going to do the same thing.' I think,
really, they underestimate the difficulty. They underestimate the time
required to make it successful. And my guess is that they will have a very
tough time."

A COMPANY IN NEED OF CASH

In the short term, however, many of Arnault's acquisitions failed
to generate the kind of cash that would justify the amount of money spent
on them. In 1999 LVMH and Prada together purchased a 51 percent stake in
Fendi, only to see the brand's sales flatten. LVMH ultimately
acquired Prada's share of the business. In 2001 operating margins
for the LVMH watch and jewelry brands were about 7 percent, less than the
10 percent of competitors. In addition, the companies under its selective
retailing division, including an auction house and the duty-free shops
ubiquitous in airports, were barely profitable.

Although LVMH's operating profit rose 26.6 percent to a record
$1.74 billion in 2000, the results failed to match expectations.
Arnault's shopping sprees appeared to have decreased operating
margins to about 17 percent in 2000, down from 25 percent in 1995. In
January 2001 several analysts cut their recommendation for LVMH from
"buy" to "neutral." Andrew Gowen, a securities
analyst who followed LVMH at Lehman Brothers in London, said in the
New York Times
(March 25, 2001), "What started to bug me was a misallocation of
capital. A lot of acquisitions pushed them into several low-margin,
low-return businesses." Arnault ultimately put the brakes on his
acquisition strategy in favor of generating some much-needed cash. LVMH
sold its interest in the Phillips auction house, and stockholders urged
that similar decisions be made about other struggling divisions.

THE FUTURE OF FASHION AND LUXURY

Arnault faced a host of challenges in early 2004. The luxury market
struggled from declines in tourist travel, crucial to the sale of designer
goods, and several LVMH brands suffered from their own financial troubles.
Japan's economy was another factor; in 2001 the country accounted
for 40 percent of sales at LVMH, but Japan's economy had been in a
recession since 2003. It even seemed questionable that mass-market brands
could continue to command top dollar. Nonetheless, Arnault was optimistic
that he could continue to generate a steady flow of profit from his brands
while ensuring the highest level of quality and creativity. As he told the
Washington Post
(April 28, 2002), "The possibility of creating very appealing
products with architects, with designers and making it commercially very
successful is what I am good at, I think, and what I like to do."

See also
entry on LVMH Moét Hennessy Louis Vuitton SA in
International Directory of Company Histories
.

sources for further information

Givhan, Robin, "The French Connection: Bernard Arnault Built a
Fashion Empire, but Don't Expect Any Air Kisses,"
Washington Post
, April 28, 2002.